Despite the difficult environment caused by the pandemic, illimity has continued to post solid results confirming the resilience of its business model. And we have created a national champion in fintech platforms for digital services through our joint venture in Hype.
Today we are reporting a very good set of Q3 results for illimity. We are on track to deliver net profits of €30m for 2020, in line with our projections, and we are proving the resilience of our business in spite of the Covid-19 crisis. At that level, illimity is achieving a return on equity of 5 percent in its first full year of activity.
We are continuing to build from firm foundations. In September we reached an agreement to buy a 50 percent stake in Hype, the country’s leading fintech challenger, and alongside our joint venture partner, Fabrick, we have created the leading open banking player. This transaction is transformative for illimity’s Direct Bank Division.
Profits jump more than 30 percent
Our pre-tax profits jumped more than 30 percent between Q2 and Q3, reaching €13.2m, with net profit for the quarter at €9.5m. Our performance across the SME and Distressed Credit divisions has been very positive. We have a highly selective approach to new business but even so, customer loans and investments volumes still rose 4 percent in the quarter. Our loan book shows no deterioration for the time being, and our growing strength in distressed credit is delivering gross cash flows ahead of our initial plan. This positive result has pushed our key regulatory capital measure – Tier 1 Common Equity – to 19 percent. This is one of the strongest levels in the industry and has improved despite our growing business volumes. We are also today reporting an extremely robust liquidity position of €700m.
New areas of growth
All parts of our business are not only delivering in line with our plan, but also developing significant new areas of growth. In the last four months, we booked new business for more than €300m, with a significant acceleration since the summer. This brings our total originations since launch to €2.4bn.
On top of it, our distressed credit division has taken a major step forward with the announcement of a deal worth €600m in gross book value in unlikely-to-pay SME loans, confirming our position as one of the leading players in this attractive and expanding market: this would bring our total UTP loan investments to €1.7bln in terms of gross book value. And our servicing platform, Neprix, now has assets under management of €9.4bn, well above target.
We see many more opportunities on the horizon. Our SME lending volumes continue to grow strongly, meeting the demand also of those SMEs that are willing to make use of the public measures made available to support the economy.
Bright future for open banking
The outlook for our Direct Banking division is bright, especially our Hype joint venture. Covid has accelerated the adoption of open banking platforms that allow customers to access innovative digital services. We see customers migrating from traditional banks towards three different types of open banking platform, all of which illimity owns.
Some customers want a full banking service with the convenience and speed that only a digital player can provide. For these, we have illimitybank.com.
Many others do not want a formal banking relationship and this fast-growing group is looking for user-friendly fintech platforms, initially to make payments and buy financial products, but over time to buy other products and services. Here, we have Hype.
Our third offering, which we will roll out over the coming quarters, will be our white-label open banking platform. Large non-financial companies will partner with us to give their customers access to new products and services, delivered through customized versions of our open banking platform.
Unlike both high-cost traditional banks and loss-making fintech apps, illimity expects to make a significant return from all these open banking services. The key position we are building in the Italian market will enable us to strike partnerships with third-party product and service providers that will enrich our proposition over time.
Less vulnerable, more resilient
In these difficult and transformational times we believe there are significant opportunities for a new paradigm bank like ours as we focus on what we see are six differentiating factors:
• Growing markets: some of the markets we target are large and set to increase beyond earlier expectations, from NPE to digital financial services.
• Sustainable margins: competition is not expected to grow in our specialty areas and we will have larger markets with lower competition.
• Resilient portfolio quality: our current portfolios are proving rather solid.
• A good time to build portfolios: distressed credits will likely benefit, given their long duration, from the inevitable recovery.
• Open banking leadership: we will ride the wave of the rapid digitalization of financial services, exploiting the potential of open banking.
• Opex advantage: we have no legacy nature and a fully digital, modular and fully-in-the-cloud architecture that grants a structural cost and flexibility advantage.
We expect the illimity business model to be less vulnerable to the recession and more capable to navigate through the cycle than most traditional banks. At the same time, we believe illimity will prove to be more resilient than most challenger banks.
We face the future with a confidence stemming not just from good strategic decisions but more importantly from our extremely united illimiters, a team of superb professionals and exceptional people.
Banks are facing tough times, as indeed is everyone in the current health and economic crisis. At illimity we value the opportunity to play our part developing a resilient business while helping Italy to recover strongly.